Xl260 Ratio Removed

Ratio Analysis Performance of the business unit can be measured and evaluated by using Ratios Ratio is nothing but expressing one quantity in terms of other. Ratio Analysis involves method of calculating and interpreting financial ratios to asses business units financial performance and condition. Basic technique involved in evaluation is COMPARING THE RATIOS e.g. expressing profit in terms of sales will be better alternative to know the 1 efficiency & effectiveness of the ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Using Financial Ratios

Types of Ratio Comparisons Trend or time-series analysis Used to evaluate a firm’s performance over time

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Using Financial Ratios

Types of Ratio Comparisons Trend or time-series analysis cross-sectional analysis

Used to compare different firms (obviously from same industry) at the same point in time

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Using Financial Ratios

Types of Ratio Comparisons Trend or time-series analysis cross-sectional analysis industry comparative analysis

One specific type of cross sectional analysis. Used to compare one firm’s financial performance to the industry’s average performance ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Using Financial Ratios

Types of Ratio Comparisons Trend or time-series analysis cross-sectional analysis industry comparative analysis Combined Analysis

Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Using Financial Ratios

Cautions while Doing Ratio Analysis Ratios must be considered together; a single ratio by itself means relatively little. Financial statements that are being compared should be dated at the same point in time. Use audited financial statements when possible. The financial data being compared should have been developed in the same way.

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Some Important Ratios Liquidity Ratios 

Current ratio

Current Ratio =

Current assets Current liabilities

To Know Firms capability to pay short term liabilities?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Current Ratio Quick Ratio

Quick ratio

= Current Assets - Inventory Current liabilities

More refined form of Current Ratio

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Inventory Turnover

Inventory Turnover = Cost of Goods Sold Inventory To Know How fast the Assets are being Converted in to Sales?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Average Collection Period

ACP = Accounts Receivable Net Sales/360 To Know How fast the outstanding bills are collected? i.e. efficiency with which the debtors have been managed? ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Average Payment Period

APP =

Accounts Payable Annual Purchases/360

To Know efficiency with which the creditors have been managed?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Total Asset Turnover

Total Asset Turnover =

Net Sales Total Assets

To Know efficiency with which Assets are being used?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Financial Leverage Ratios Debt Ratio

Debt Ratio = Total Liabilities/Total Assets To Know to what extent firm is employing borrowed funds?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios Times Interest Earned Ratio

Times Interest Earned = EBIT/Interest To Know how comfortable the firm is, as regards interest payment liability ?

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios

Profitability Ratios Gross Profit Margin

GPM = (Gross Profit/Net Sales)*100 To Know Profit earning capacity against sales?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Operating Profit Margin

OPM = (EBIT/Net Sales)*100 To Know Profit earning capacity against sales?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Net Profit Margin

NPM = (Net Profits After Taxes/Net Sales)*100 To Know Profit earning capacity against sales?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Return on Total Assets (ROA)

ROA = (Net Profits After Taxes/Total Assets)*100 To Know Profit earning capacity against Assets ?

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios

Profitability Ratios Return on Equity (ROE)

ROE = Net Profits After Taxes/Shareholders Equity To Know Profit earning capacity against shareholders funds? ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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Ratio Analysis Liquidity Ratios Activity Ratios Leverage Ratios

Profitability Ratios Earnings Per Share (EPS)

EPS = Earnings Available to Common Stockholders Number of Shares Outstanding To Know Profit earning capacity per share holder? ©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

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